Oil Prices Fall as Supplies Trump Iran Concerns

Oil prices slumped 3 percent on Tuesday as dealers anticipated another increase in already robust U.S. crude supplies, pushing worries over Iran's oil exports into the background.

U.S. crude settled down $2.02 to $63.09 a barrel on the New York Mercantile Exchange, extending losses since late January to more than $5. In London, Brent traded down $1.77 at $61.56 on the International Petroleum Exchange.

The losses came ahead of a U.S. government report that was expected to show an increase in domestic crude inventories of 800,000 barrels and a boost in gasoline supply of 1.6 million barrels, according to a Reuters survey.

U.S. crude stockpiles are already more than 10 percent higher than they were a year ago, the result of increased foreign shipments and slower refinery activity.

"There is a growing discontinuity between the fundamentals and the futures market," said Joseph Arsenio, head of Arsenio Capital Management in California. "Supply continues to expand, and demand growth has been modest at best."

Oil's big price drop came as funds and speculators took profits in other commodities as well. Gold posted its biggest one-day decline in dollar terms since 1993.

Tuesday's losses in the oil market were limited by continuing concern that a diplomatic crisis with Iran over its nuclear ambitions could lead the OPEC nation to cut its exports in protest, or to sanctions that limit its shipments.

British Prime Minister Tony Blair said fears of a spike in the oil price should not stop the international community from imposing sanctions on Iran, the world's fourth biggest oil exporter, over its nuclear program.

Iran says it wants to develop its nuclear research to produce energy, but the United States and other nations are concerned Tehran wants an atomic bomb.

"What people are feeling is that Iran is a longer-term issue," said Justin Smirk, senior economist at Westpac. "The focus is on the now, and inventory rises continue to suggest an easing in tightness — not just week to week, but also month to month."

U.S. gasoline futures fell 5.42 cents to $1.59 a gallon as the market grew more confident the United States would be well prepared for the peak summer driving season.


Saudi Arabia, the world's top oil exporter, said Tuesday it had "concerns" about the Bush administration's recent call to cut its addiction to Middle East oil.

"What concerns us is all the talk about not wanting our oil," Saudi Oil Minister Ali Al-Naimi told an energy conference hosted by Cambridge Energy Research Associates.

In his State of the Union address last Tuesday, Bush said America was addicted to oil and needed to slash imports from the Middle East by more than 75 percent by 2025.

The head of the International Energy Agency, the West's energy watchdog, said this week Bush's pledge to cut Middle East oil imports would not help persuade OPEC to spend the huge amounts of cash needed to meet future oil demand.

Saudi Arabia, the de facto leader of the Organization of Petroleum Exporting Countries, plans to boost its production capacity from 11 million barrels per day to 12.5 million bpd by 2009.

"We will continue to be a source of stability for world energy markets," Naimi said. "We are addressing the problem of availability head on."

The price of oil has doubled in a two-year rally as strong demand in the United States and the fast-growing economies of China and India crunched global spare capacity.

Funds managing billions of dollars of pension money have entered the market in force.

"The funds see economic growth is expected to continue, and over the last two years commodities have outperformed every other asset class," SG Commodities' Alexandre Kervinio said.